US dollar funding costs fall back to pre-coronavirus crisis levels

A key measure of the cost of short-term dollar financing has tumbled to the levels last seen before the beginning of the coronavirus crisis in March. 

After surging nearly to 140 basis points at the end of March, the spread on the three-month London Interbank Offered Rate (LIBOR) for dollars over the overnight indexed swap rate, known as the Libor-OIS spread, has declined to below 20 basis points, the lowest since the end of February/early March. 

The meteoric rise seen in March was fueled by the global dash for cash, mainly U.S. dollars,  triggered by the coronavirus induced sell-off in the global equity markets. The US Federal Reserve quickly stepped in by launching a string of measures to stabilize credit markets and opened dollar swap lines with other central banks.

In other words, the Fed has killed the funding stress with the printing press, as noted by popular analyst Holger Zschaepitz. 

As such, the recent dollar sell-off does not look surprising. Last week, the dollar index, which tracks the value of the greenback against majors, fell to 92.55 to hit the lowest level since May 2018.